"The market is too risky right now." That's a common theme I hear among individual investors these days. From one perspective, this appearance of risk is right-on. A whole slew of companies are still either very highly valued (cough, cough, Harley-Davidson (NYSE: HDI)) or have horrible fundamentals (ahem, Sears (NYSE: S)).

As Tom Gardner recently stated in Motley Fool Stock Advisor, probably only one out of every 50 stocks is a worthy investment. But even if only 2% of the stock market is attractive right now, that's something close to 174 good stocks waiting to be found. And with prices still drifting lower for the most part, my view is that many stocks are now less risky than at any time in the past seven years. Good, undervalued companies are out there -- we just have to dig 'em out.

Currently, I have 16 companies on my small-cap value radar I've identified as interesting candidates for further investigation. Today, I want to take a first-cut look at four of them. Then, in my next three columns, I'll cover the remaining 12. In sum, we're going to look at 16 promising investment candidates, out of which I think we have a good shot of finding at least one or two real winners. For me, this is the real thrill of investing: the hunt for great ideas. I hope you'll enjoy this series as much as I know I will -- and I hope we'll all profit.

While I haven't yet done any in-depth sleuthing on the companies I'm about to present, all four have some promising financial characteristics:

  • A valuation of no more than 10 times free cash flow or earnings
  • A balance sheet with more cash than debt
  • A three-year track record of consistent positive cash flow from operations
  • A stock price above $5

These are stocks I only recently uncovered, so my goal here is to take a quick look at each one and then flag any that look worthy of follow-up research. At the end of the column, I'll tell you which of these I'm personally most interested in digging deeper into.

Elite Information Group (Nasdaq: ELTE) provides practice management software to professional service firms, primarily law practices and management consulting firms that need sophisticated software for timekeeping and billing. Elite's software powers more than one-half of the top 100 U.S. law firms, more than one-third of the top 1,000 U.S. law firms, and approximately one-third of the top 100 law firms in the U.K.

Since 1997, revenues have grown from $33.9 million to $68.8 million last year -- all while reducing the number of shares outstanding by 11%. In July this year, the stock was whacked by nearly 50% because of a contract dispute with a significant customer that caused a reversal of $400,000 in revenue (2% of the quarter's revenue). At $5.89, the stock looks cheap at 9.3 times free cash flow, plus $3.33 in cash per share.

Todd Shipyards (NYSE: TOD) is in the business of ship overhaul, conversion, and repair, primarily for the U.S. government. Revenue growth has been slow but steady over the years, with revenues rising from $114.4 million in fiscal 1997 to $121.9 million in the most recent fiscal year (ended in March). Earnings over the years have been lumpy, ranging from a loss of $21.3 million in 1997 to a high earnings year of $17.4 million in 1999.

The impressive part of this story is that management last year recognized its stock was undervalued and thus repurchased 42.7% of the outstanding shares in a Dutch Auction for $8.25 per share. Today, with the stock at $12.15, the shares trade for a low 4.1 times free cash flow and 9.6 times earnings, plus $5.53 cash per share.

My inclination, however, is that the current price may not be as cheap as it looks considering: 1) the cyclicality of earnings and 2) the asbestos claims that are mentioned in the 10-K.

Rimage Corp. (Nasdaq: RIMG) makes CD-recordable (CD-R) and DVD-recordable (DVD-R) publishing systems that allow businesses to create discs, in low or high volumes, with customized content. An example of a typical Rimage customer is Eastman Kodak (NYSE: EK), which uses these publishers to generate customer photos on CD.

I think Rimage's publishers are an interesting concept and probably useful to more and more businesses these days, but I'm wary of companies that sell high-priced products to large business customers  -- it's a recipe for sales disappointments and compressed profit margins.

Since 1999, when Rimage began focusing almost exclusively on the CD-R and DVD-R publishing systems, sales have been down, then up, and overall about flat with what they were in '99 -- all with deteriorating gross margins. With few signs of meaningful growth on the horizon, the stock at $8.95 isn't in my opinion overly cheap at 9.8 times free cash flow and 14.6 times earnings.

American Pacific Corp. (Nasdaq: APFC) is a specialty chemicals company, primarily focused on ammonium perchlorate (AP), which is used as an oxidizing agent in composite solid propellants for rockets, booster motors, and missiles. AP has uses in space exploration, commercial satellite transportation, and national defense programs.

Throughout the 1990s, AP sales volumes declined due primarily to fewer commercial space launches. Then, in 1998, in the face of a capacity glut, American Pacific acquired Kerr-McGee Chemical Corp. to become the sole North American producer of AP. After taking on $75 million in debt to make this acquisition, American Pacific today has paid down its debt to $40.6 million, while also building up cash on hand of $49.7 million.

Over the past seven years, the company's average operating cash flow margin was 23.1%, and capital expenditure requirements have been consistently low. Since 1998, sales have remained in a narrow band, but recently sales have begun to grow nicely, up 23% over the past nine months on the strength of defense-related AP demand. At $7.95 per share, the stock looks cheap at 4.8 times free cash flow and 5.9 times earnings.

So there we have it -- four promising stocks, out of which two beckon my further research efforts: I'll be most interested in doing some in-depth analysis of Elite Information Group, while American Pacific also seems worth a closer look.

In tomorrow's Fool on the Hill, I'll present four more stocks from my radar, so be sure to check back in. In the meantime, if you have insights on any of the companies I've mentioned, or if you have a stock idea of your own that you think I'd find interesting, please shoot me an email at MattR@fool.com. I always appreciate your feedback. On any stock ideas that you send, please give me a brief explanation of what fundamental characteristics make the stock attractive.

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Matt Richey is a senior investment analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. Matt's personal portfolio is available for view in his profile. The Motley Fool is investors writing for investors.